Pensions Tax Simplification Newsletter No 21

31 October 2006

Contents

1. Introduction

Welcome to the twenty first edition of the Newsletter. As usual, this contains a mixture of articles of a technical and operational nature, along with some useful reminders to help you if you need to contact HMRC.

Please pass this Newsletter on to anyone else in your organisation who you think may find it useful.


2. Pre-6 April 2006 “surpluses” in annuity policies purchased from an occupational pension scheme – lump sum payments

Lump sum payments to members

1. Pensions Tax Simplification Newsletter No 14 explains how “surpluses” that have built up in pre-A day compulsory purchase annuities might be dealt with on or after 6 April 2006. One possible option is to pay the “surplus” to the member as a one-off lump sum payment and having it taxed as an unauthorised payment.

2. Where the “surplus” is paid to the member as a lump sum then, as the payment is in connection with the annuity in respect of which the “surplus” arose, the payment of the lump sum is brought within the registered pension scheme rules by virtue of sections 161(3) and (4) of Finance Act 2004 (as extended by Article 2 of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 SI2006/No572).

3. The effect of sections 161(3) and (4) (as extended) is to treat the lump sum payment as if it was made by the occupational pension scheme in respect of which the annuity was purchased. This would mean that the lump sum is treated as made by a registered pension scheme as the scheme that purchased the annuity would either have automatically become a registered pension scheme on 6 April 2006 or, if it wound up before that date, the scheme would otherwise be treated as a registered pension scheme.

4. As paying the “surplus” as a one-off lump sum to the member is treated as being paid by a registered pension scheme, that payment must fall within the authorised member payment provisions for it not to be an unauthorised member payment. It is very likely that such one-off lump sum payments will be an unauthorised member payment.

5. Where such a payment is an unauthorised member payment, the same tax charges will apply as with most other unauthorised member payments – the unauthorised payments charge, the unauthorised payments surcharge (where applicable) and the scheme sanction charge. The member is liable for the unauthorised payments charge and unauthorised payments surcharge (when it applies) and the Scheme Administrator of the occupational pension scheme treated as making the unauthorised member payment is liable to the scheme sanction charge.

6. If the pension scheme out of which the annuity was secured had wound up before 6 April 2006, there has never been a Scheme Administrator of that scheme for the purpose of Part 4 of Finance Act 2004. The practical effect of this would be that the scheme sanction charge would not apply. However, the unauthorised payments charge and the unauthorised payments surcharge (where applicable) would still apply in respect of the member.

7. In other cases, where the pension scheme has not yet wound up (or has wound up since 6 April 2006), the scheme sanction charge will apply. The Scheme Administrator of the scheme pension will be liable for the charge (in the case of a pension scheme that has wound up since 6 April 2006, the liable person(s) is whoever was the Scheme Administrator immediately before the scheme wound up – section 239(3) of Finance Act 2004).

8. However, HMRC assumes, in the vast majority of cases, that the Scheme Administrator will not know that the unauthorised member payments are being made by the insurance company. In such circumstances, the “good faith” let out for the scheme sanction charge is very likely to apply in respect of the Scheme Administrator. (Also, HMRC accept, of course, that in most of these cases, as they will not be aware of payments, the Scheme Administrator will not be able to report the unauthorised payment in the first place.) Alternatively, it is unlikely that the good faith let out for the scheme sanction charge would apply if the recipient were still a trustee of the scheme or was connected to a trustee or if the annuity provider was the Scheme Administrator of the pension scheme treated as making the unauthorised payment or if the annuity provider is in contact with scheme officials, or employer, to discuss how the “surplus” might be dealt with.

9. As is the case with any unauthorised payment, there is no requirement for the person making that unauthorised payment to deduct out of it and account to HMRC an amount to cover the tax charge(s) that will apply to the recipient of the payment; the tax charges(s) in question being the unauthorised payments charge and, where applicable, the unauthorised payments surcharge. The member in respect of whom the unauthorised payment is made is responsible for accounting for these charge(s) to HMRC unless the payment is made after the member’s death, when the recipient of the payment is responsible for accounting the charge(s) to HMRC. (If there is more than one recipient of the unauthorised payment made after the member’s death, all of the recipients are jointly and severally responsible for accounting for the charge(s).)

10. We understand that some annuity providers are not certain about the taxation arrangements when paying the “surpluses” as a one-off lump sum to the member. Any such annuity provider can contact HMRC to clarify matters. When doing so, please give the number of cases, the average size of payment to members and the total annuity surplus held. These details should be sent to Kerry Singleton, Service Delivery and Compliance Manager, Audit and Pension Schemes Services, Yorke House, Castle Meadow Road, Nottingham NG2 1BG.

11. Other annuity providers who also intend to make one-off lump sum payments but have yet to decide on a final strategy for making the payments can also contact Kerry Singleton, again giving the same information, to discuss the possible taxation implications for the payments that are to be made.

12. Where annuity providers are proposing (or have made) payments to members without withholding any amount to settle the tax liabilities of the member, HMRC will be asking those providers for details of the recipient and the amount paid. This request will be made under information powers contained in Part 4 of Finance Act 2004.

Lump sum payments to employers

13. If, instead of paying the “surplus” to the member, the “surplus” is paid to the employer in relation to the occupational pension scheme in respect of which the annuity was purchased, any such payment is unlikely to be an unauthorised payment for the purpose of the tax rules in Part 4 of Finance Act 2004. This is on the basis that the payment is in connection with an annuity that came into payment before 6th April 2006 and the payment of the “surplus” would have been an acceptable payment under the old tax rules for pension scheme. If so, the payments will be outside the new rules for registered pension schemes by virtue of Article 2 of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 SI2006/No572.

14. Should it be decided to split the “surplus” between the employer and the member, the payment to the employer will be treated as being made from a registered pension scheme under Article 2 of the of the Taxation of Pension Schemes (Transitional Provisions) Order 2006 SI2006/No572. If the payment to the employer can satisfy either regulation 2 or regulation 3 of the Registered Pension Schemes (Authorised Surplus Payments) Regulations 2006 SI2006/No574, the payment will be an authorised surplus payment and the authorised surplus payments charge will apply in respect of the payment. The rate of the charge is 35%, based on the amount of the payment to the employer, and the Scheme Administrator of the pension scheme treated as making the payment is liable for the charge and must account for it to HMRC using the Accounting for Tax by Scheme Administrator form.

15. If the payment to the employer cannot satisfy the requirements of the Registered Pension Schemes (Authorised Surplus Payments) Regulations 2006 SI2006/No574, the payment will be an unauthorised employer payment and the usual tax charges associated with such an unauthorised payment – unauthorised payments charge, unauthorised payments surcharge (where applicable) and scheme sanction charge - will apply.

3. Pre A-day pension- classification under new tax rules

Continued doubts have been expressed about how to view pre A-Day pensions that are payable by insurance companies, and in particular when such pensions might be considered to be a 'scheme pension'.

Where a scheme is treated as having become a registered pension scheme on 6th April 2006, by the automatic operation of Schedule 36, paragraph 1, FA2004, pensions in payment directly from that scheme, and due to purely defined benefit rights, will be 'scheme pensions' whenever they meet the conditions in paragraph 2 of Schedule 28 (for example, they are being paid by a Scheme Administrator).

However, the position is different for pre A-Day pensions payable by insurance companies, even insured pensions that had been purchased by defined benefit schemes.

For example, immediately vesting pension annuities that were bought in the name of the member before A-Day remain outside the scope of the new authorised payment rules - paragraph 2 of Schedule 28 does not apply to them. Such pensions will be regarded as pre A-Day annuities which are neither 'scheme pensions' nor 'lifetime annuities', they simply continue to be taxed as pension income in the usual way. It is only when such annuities fail to meet the conditions in Article 2(3) of Statutory Instrument 2006 No. 572, that they might come into the new authorised payment rules. Even in the event that they are brought into the new authorised payment rules, this does not mean that they become 'scheme pensions'. RPSM09101000 provides guidance on these two different kinds of pension provision.

4. What is meant by the term ‘single transaction’ for a ‘block transfer’?

Some elements of transitional protection can be maintained after a transfer as long as that transfer is a block transfer as defined in Paragraph 22(6) Schedule 36 FA 2004. In order for a transfer to be a block transfer, all of the sums and assets in a pension scheme relating to that member must be transferred in a single transaction. We have been asked to clarify what is meant by a “single transaction”, especially where the sums and assets are passed from one scheme to another on different days.

Firstly to qualify as a single transaction all of the sums and assets must be transferred from the transferring scheme to only one receiving scheme. Two or more partial transfers to two or more different schemes cannot be a transfer in a single transaction.

Secondly the transaction must be made under a single agreement for a single transfer between the two schemes.

Thirdly it is not necessary that all of the sums and assets are all physically passed from the transferring scheme to the receiving scheme on exactly the same day – there may be legal or administration reasons why this is not possible. However they should all be transferred in relation to the agreement to transfer and within a reasonable timescale.


5. Employer- Financed Retirement Benefit Schemes – Provision of Non-Cash Benefits after 6 April 2006.

There have been changes to the legislation concerning the employment income charges relating to what were previously known as non-approved retirement benefit schemes (often referred to as FURBS or UURBS).

This note does not cover all aspects of the schemes which from 6 April 2006 are known as Employer-Financed Retirement Benefits Schemes but is to draw attention to one particular change in the treatment of non-cash benefits provided under such a scheme.

The position before 6 April 2006 was that non-cash benefits were only taxable as employment income on the recipient if the scheme also provided cash benefits. If only non-cash benefits were provided no tax charge arose on retired individuals. Part 2, Chapter 6 Income Tax (Earnings and Pensions) Act 2003 was amended by S249 Finance Act 2004. The change in legislation now applies the tax charge across the board, to prevent the anomaly where some individuals receiving non-cash benefits were taxed and others were not, simply due to the different arrangements under which the benefits were provided.

There is guidance on the employment income aspects of employer-financed retirement benefit schemes including reporting responsibilities and these are in the Employment Income Manual (15000-15429) which can be accessed through the HMRC website.

The first year affected by the change is 2006/2007 and HMRC has been approached with requests for amendments to coding to be made as soon as information about the benefit is provided even though this may be in advance of the deadline for returning the details of 7 July 2007. HMRC will, as always, amend coding when given sufficient information and requested to do so by the individual. We will also undertake to make coding adjustments as soon as possible after the provision, by the responsible person, of the information required even if this is in advance of the reporting date.

6. Qualifying Recognised Overseas Pension Schemes (QROPS)

We have published on our internet site a list of those QROPS that have consented to the disclosure of their status so as to make it easier for you to check if an overseas pension scheme is a QROPS. The list was published for the first time on 6 September and an updated list was published on 6 October. The list will be updated monthly.

Please note that because of the confidentiality rules that apply to HMRC we have had to exclude from the list those schemes that have not consented to go on it. And we will not be able to answer enquiries about the QROPS status of an unlisted overseas pension scheme unless we receive from the manager of that scheme written authorisation to disclose whether or not it is a QROPS.

The manager of an overseas pension scheme that is a QROPS will have received a letter of acceptance from us so another way of checking on its status would be to ask to see that letter.

Chapter 14 of our Registered Pension Schemes Manual Guidance will be amended to reflect this position.

7. Employer Contributions to Registered Pension Schemes

Some of the HMRC guidance on employer’s contributions to registered pension schemes, after 6 April 2006, will be in the Business Income Manual (at BIM46000 onwards) rather than the Registered Pension Schemes Manual. The BIM guidance will principally cover the application of the wholly and exclusively rules to pension scheme contributions. A new chapter of the BIM incorporating this guidance will be published shortly. This will include an update as to how the legislation applies to payments into multi-employer group pension schemes. If you wish to gain access as soon as possible after publication check periodically in the HMRC internet Practitioner Zone selecting library, manuals and updates. We will confirm in a future Newsletter that publication has occurred.

8. Notifications for Enhanced Protection and Enhanced Lifetime Allowance

We will shortly be moving to a new IT system for issuing certificates for lifetime allowance protections and this will affect some existing processes.

The new system will issue certificates centrally. This means that APSS will no longer be able to meet requests made in covering letters for certificates to be sent to a person or an address that is different to the one on the form. All certificates will be sent to the person making the notification at the address specified on the form. If an individual wants the original certificate to go to an IFA or other person, they must use a “care of” address on the form.

If certificates are subsequently lost or misplaced, APSS will still be able to supply duplicate details to authorised persons although the format of this information may differ from the original certificate. When there is a benefit crystallisation event, Scheme Administrators will have the facility to view certificate details on-line if they are authorised by the individual to do so.

Since 6 April 2006, individuals notifying their entitlement to enhanced protection or enhance lifetime allowance have been issued with temporary certificates. Over the course of the next few months, these will be replaced with permanent certificates. We will let you know when the replacement process is complete. Please do not contact APSS before this if you have not received your permanent certificate as the temporary certificate will remain valid until it is replaced.

9. Scheme Wind-Ups

When a pension scheme winds-up, APSS should be notified.

For those schemes that wound-up prior to 6 April 2006, the old reporting form (PS199) is no longer available (see Newsletter No 19), and therefore we suggest that Administrators use form APSS 300 (PDF 109K) to notify APSS of wind-up. All relevant sections on the form should be completed as far as possible.

For schemes that wind-up, on or after 6 April 2006, the Scheme Administrator immediately before winding-up is required to report this to HMRC within 3 months of winding-up. This must be done using the APSS 300 (PDF 207K) (Event Report). All relevant sections of the report must be completed and pages 1-10 should be included, even if blank. Both declarations must be completed and the form signed by the Scheme Administrator and details completed. We would not insist on the Scheme Administrator having notified APSS that they are the Scheme Administrator unless of course they became the Scheme Administrator on or after 6 April 2006 (for further guidance see ‘Notifying HMRC you are a Scheme Administrator of a pension scheme’).

APSS has until now adopted a flexible attitude when dealing with paper forms, to allow customers to settle into the new regime. As from the date of this newsletter APSS will reject any forms which are not completed correctly.

APSS has also received a number of APSS 300’s that have reported a change in scheme’s membership to ‘0’, rather than reporting a wind-up. If a Scheme is wound up, the wind-up date entered at section 2.1. You do not need to complete section 2.8 if the only reason the membership banding has changed to ‘0’ is a result of the scheme completing wind-up (which must be reported at section 2.1).

10. Contracting-out Booklets CA14C, CA14D, CA14E and CA16A

The Contracting-out booklets, CA14C, CA14D, CA14E and CA16A have been revised and will be put on the Internet shortly. The revisions include:

  • References to the new contracting-out forms for making elections and notifying changes to the contracting-out certificate
  • Correct names of the offices involved in the contracting-out process
  • Cessation of the Annual Statement CA7329 from April 2007 for Appropriate Personal Pension Schemes
  • Some technical changes and corrections following recent changes to legislation

If you have any queries regarding the changes please contact the APSS Helpline on 0115 974 1600.

It is intended to replace these booklets with contracting-out guidance in the Registered Pension Schemes Manual in due course.

11. New form published for Appeals

A new form, APSS 413 – Notice of Appeal and Application to Postpone Payment (PDF 125K) has been published on the internet today.

This form can be used by customers to appeal against an assessment or a penalty determination made by Audit and Pension Schemes Services. If you appeal against an assessment, you may also use this form if you want to postpone payment of all or part of the tax charged by the assessment.

12. Accounting for Tax return deadline

The deadline for submitting the Accounting for Tax return for the quarter ending 30th September is 14th November. More information can be found in Newsletter no 20.

13. 1SF Forms

If you have any 1SF forms outstanding for the tax year 2004/05 and any earlier years, these should be sent to:

Luke Saxton
Audit & Pension Schemes Services
Yorke House
Castle Meadow Road
Nottingham
NG2 1BG

together with the appropriate remittance. If you need any assistance please call Luke on 0115 974 1665.

The 1SF should not be used for tax charges incurred on or after 6th April 06.

The only exception is where the tax charge is incurred as a result of an authorised ‘pipeline lump sum’ payment – see the answer to the question ‘I normally submit 1SF/2SF/3SF, should I still be doing these?’ from the Accounting for tax return and Online filing article published as part of the Pension Simplification Newsletter 20 for further guidance.

14. Online filing figures for September

We have now passed six months since A-day (6 April 2006) and the introduction of the new Pension Schemes Online service.

The following figures show the percentage of the main forms available on Pension Schemes Online that were submitted online during the month of September.

New schemes registered 86% completed online
Declaration for a Deferred Annuity Contract 98% completed online
Amend scheme details 87% completed online
Add Scheme Administrator 58% completed online
Accounting for Tax return 57% completed online

As you can see, many customers are now using the online service and we hope over the next few months to encourage more and more of you to use the service, particularly to submit any returns or reports that are required.

15. Contact Us

If you have any questions about anything to do with new tax rules and you can’t find the answer in the Registered Pension Schemes Manual, please contact APSS by e-mail or phone our helpline number 0115 974 1600 (9.00 to 17.00 Monday to Friday) or you can write to us at

Audit & Pension Schemes Services (APSS)
Yorke House
Castle Meadow Road
Nottingham
NG2 1BG